Daily Tax Report: International

Impact of MLI on Turkey-Netherlands Double Tax Treaty and Dutch Holding Structures

Nov. 27, 2020, 8:00 AM

The Netherlands, a holding center of the world for many years, is often preferred by outbound Turkish investors, having the advantages of a holding location (such as geographical location, economic opportunities, investment environment and facilities, financing opportunities, guarantees regarding the protection of investments in third countries to be invested, etc.) and also having very advantageous provisions in its double tax treaty with Turkey.

According to statistics, approximately 30% of outbound investments from Turkey are made via the Netherlands, and it is anticipated that capital exported to the Netherlands is approximately $50–100 billion in the form of authorized capital or premiums on capital stock.

As the Netherlands has increased the minimum liabilities it expects from companies as a result of the increasing pressures in the international tax arena in recent years, Turkish investors bear increasing costs in the Netherlands and strengthen their companies. There are no more letterbox companies in the Netherlands as in the past, and many executives from Turkey have been appointed to perform actual management functions of those companies in the Netherlands.

In addition to the advantages mentioned above, the Netherlands has reinforced its advantageous tax position thanks to its easy to apply participation exemption regime and recently enacted withholding tax exemption on dividend distributions to companies resident in a treaty country, including Turkey.

Advantages of the Double Tax Treaty

What we have explained above applies to many countries that position themselves as an international holding center, so we will now focus on the tax treaty provisions that make the Netherlands unrivaled for Turkish investors.

Although, together with other criteria, in order to exempt dividends from foreign shareholdings Turkey looks for at least a 15% effective (local) corporate and withholding tax burden in the foreign jurisdiction on dividends transferred, thanks to the double tax treaty between Turkey and the Netherlands, dividends from subsidiaries in the Netherlands could be exempted from taxation in Turkey as long as there is a minimum 10% shareholding in a Dutch entity.

While the majority of Turkey’s tax treaties provide prevention of double taxation through offsetting of taxes paid abroad (credit method), the double tax treaty between Turkey and the Netherlands is one of the tax treaties that is an exception.

For example, if the effective tax rate is lower than 15% in a foreign subsidiary location, the tax burden on dividends distributed from that subsidiary to Turkey may be increased to 22%. On the other hand, with the introduction of a Dutch holding company, the total tax burden over foreign dividends could be limited to the taxes paid in the foreign subsidiary location (unless that subsidiary qualifies as a controlled foreign company as per Turkish regulations), and there are no extra taxes as a result of the Turkey–Netherlands dividend traffic. This situation is of course within the knowledge of the tax administration, and although it has been the intention to remove the exemption from the Turkey–Netherlands tax agreement for many years, negotiations have not yielded any results.

Today, we are close to achieving this result, and in this article we will discuss the fate of the Dutch agreement and the companies that have heavily invested in the Netherlands for many years.

Outcome of the Multilateral Instrument

For the last 10 years the base erosion and profit shifting (BEPS) initiative has been the hottest topic on the international tax agenda, developed by the Organization for Economic Co-operation and Development (OECD) and imposed on member countries to make the necessary regulations in their domestic legislation.

One of the BEPS action plans (Action 15) is the multilateral instrument (MLI) which was signed in Paris in 2017. Its aim is to replace the double tax treaties that can no longer respond to today’s conditions and became insufficient to prevent tax evasion, which is one of the most important purposes of the BEPS initiative; it also aimed at fulfilling the legal gaps in these agreements.

Even though this was the intention of the OECD, the MLI was not able to be fully above the double tax treaties and could not have the power to completely change or even replace them. Countries accepted certain articles, but had reservations for certain articles, hence a uniform application could not be possible. For this reason, the MLI has turned into a kind of rag bag, with a different meaning for each signatory country, and is not able to fulfil its objectives precisely, and no country can fully conclude on the approach of another country.

Turkey signed the MLI in 2017 and made reservations to those provisions other than the minimum standards, meaning that the articles of the MLI will not be taken into account, and the relevant articles of double tax treaties will continue to apply. Article 5 of the MLI regarding the prevention of double taxation was among Turkey’s reservations in the first signature. This meant that the exemption clause of the double tax treaty between Turkey and the Netherlands, on which amendment attempts had been made for many years, would remain in force—contrary to the intention of the Turkish tax administration.

The MLI entered into force for the Netherlands from January 1, 2020 but is not yet in force in Turkey. However, the legislative proposal was submitted to the Grand National Assembly of the Turkish Parliament Plan and Budget Commission on June 2, 2020, and the approval process was initiated.

It was at this point that Turkey, having made reservations to Article 5 in 2017, opted for Option C in the legislative proposal submitted to the Assembly, and chose the offset method as the method to prevent double taxation. As discussed below, this means if the proposal is enacted in this way, the exemption provision of the double tax treaty between Turkey and the Netherlands which has existed for many years will be abolished and all tax advantages will be lost.

Why will the Exemption be Abolished?

With regard to Article 5, the Netherlands chose Option A, the exemption method, in line with its legislation. Turkey will choose Option C (tax credit method), in line with its legislation, if the legislative proposal is enacted. So far, it is a highly anticipated situation; it is also stipulated in the MLI that different options can be selected by countries.

When we look at this issue from the Netherlands perspective, we see a country that is positioned as the holding center of the whole world, and it would normally be quite unfavorable for other countries to choose the credit method and tax the dividends distributed from the Netherlands instead of exempting, which is contrary to the current tax treaties offering the exemption method.

The Netherlands could therefore prevent the other country from introducing the credit method with the MLI instead of the exemption method in the applicable tax treaties, by putting a reservation in paragraph 9 of Article 5 of the MLI.

The Netherlands did not make such a reservation in the first signing of the MLI or during the enforcement process, and as clearly stated in Article 282 of the explanatory notes annexed to the MLI, it can no longer take action to restrain countries that chose the offset method. Therefore, no steps can be taken by the Netherlands, and verbal conversations with Dutch authorities also confirm this. What matters now is how the proposal will be enacted in Turkey, and both the tax administration and investors will continue to follow this issue very closely.

Let us take a step back and evaluate the result of this situation for the Netherlands. There are five countries (Argentina, Romania, Norway, Portugal and India) in a similar situation as Turkey (i.e. not having completed the legal process for the MLI). Apart from Norway, these countries are not capital exporting countries, so this is not a huge loss for the Netherlands. Nevertheless, this may be unknown for the Netherlands throughout the whole process, rather than being accepted from the beginning.

Effects for Turkish Investors and Turkish Tax Administration

First, let us make an important point. The Dutch companies we are talking about here are holding companies established in the Netherlands by Turkish companies for channeling their investments in third countries and the income derived from these countries is exempted in the Netherlands.

There will not be a significant difference regarding operational companies in the Netherlands whose income is subject to corporate tax. Dividends derived from these operational companies will still be exempted from taxation in Turkey as long as the conditions in Article 5/1-b of the Corporate Tax Law are satisfied; the change in the tax treaty will not affect this result.

In a situation where the exemption provision in the double tax treaty is no longer valid after the MLI, dividends received through the Dutch holding company will face an additional tax burden of 22% (projected to decrease to 20% by 2021) since the minimum tax burden of 15% would not be satisfied in the Netherlands.

Taxes paid in the third country will not be deductible from the tax calculated in Turkey, because Turkey’s legislation only allows deduction of corporate tax and dividend withholding taxes paid directly in the participating country. As a result, there will not only remain a Dutch holding company whose necessity is controversial, but even worse, a Dutch holding company that has lost its function and has led to a 22% increase in the tax burden of its Turkish investor. This will mean that Turkish companies will/can no longer invest to third countries through Dutch holding companies.

As a natural consequence of this situation, we can foresee that there will be dividend distributions from Dutch holding companies until the time the MLI enters into force. As discussed below, it is possible to make tax-free dividend distributions by making use of the provisions of the current tax treaty until such time as the mentioned change is likely to come into force. Asset amnesty, which is on the Turkish agenda nowadays, will constitute an important tool in this regard. The fact that there is currently no automatic exchange of information between Turkey and the Netherlands will intensify the asset amnesty applications. In this regard, an intense cash inflow can be expected in the short term for Turkey, either through dividend distribution or asset amnesty.

While, in the long term, dividends distributed from countries where there is at least a 15% tax burden can be exempted in Turkey, companies established in countries with a tax burden in the range of 10%–15% cannot be forced into dividend distribution and subsequent taxation, since they do not qualify as controlled foreign companies (CFC).

In addition, companies in countries with less than a 10% tax burden, which are the main target group, have already left these structures or are already subject to taxation in the Netherlands as a result of Dutch CFC regulations since 2018. Therefore, with this arrangement, tax revenues may not increase as expected. It is clear this was not the case in the past, with structures having no economic reality, but only one cash box and one desk; Turkey’s tax revenues have been eroded.

Consequently, it is natural that Turkey, as a developing country, is now seeking tax revenues. However, the actions of the BEPS initiative no longer allow such structures to exist internationally, and therefore the juice may not be worth the squeeze.

So, what will be the fate of Dutch holding companies after this arrangement?

The first option will be the liquidation of Dutch holding companies which are located on top of the companies operating in countries where the tax burden is at least 15% and therefore whose dividends can be exempted in Turkey even in the absence of a Dutch holding company. There will be no taxation in Turkey and the Netherlands on distribution of earnings related to liquidation. Likewise, capital repayment will not be taxed in the Netherlands or Turkey. The exchange rate difference (i.e. FX gains) that will arise in the repayment of the foreign currency denominated capital will create a serious obstacle for liquidation, since it will be a taxable income for Turkish tax purposes.

One of the most important focus points for Turkey in recent years has been bringing foreign currency savings to Turkey, keeping foreign exchange reserves at a reasonable level and controlling currency fluctuations. In this regard, it would be an important choice between taxing exchange rate differences incurred over the returned capital previously injected into Dutch holding companies or making regulations regarding not taxing the revenues borne from liquidation in order to bring foreign currency savings to Turkey. In this respect, we can expect the issue of taxation or exemption of foreign exchange differences arising in the liquidation of foreign subsidiaries to be a popular topic for discussion in future.

If liquidation is not preferable, it is quite possible to use Dutch holding companies for group financing purposes, as a second option. The interest income will be subject to corporate income tax in the Netherlands at a parallel rate applied in Turkey, and thus holding companies will avoid CFC status. The fact that interest expenses are subject to deduction, after taking into account thin capitalization and transfer pricing limitations, will not change the total tax burden for Dutch holding companies, hence the only result for the Turkish tax administration will be the loss of foreign exchange savings which cannot come to Turkey, although they are very much needed.

In the event that Dutch companies are excluded from the investment structures, Turkish companies will no longer be able to benefit from the Netherlands’ very extensive and advantageous tax treaties with third countries. This will mean an increase in withholding taxes on dividend distribution from relevant countries, which again will not bring any benefit for Turkey.

When the problems related to liquidation and the possible increase in tax burden are considered together, and considering the investments made and habits gained over the years, it is clear that Dutch holding structures will not be easily dispensable, since the issue is not just about a tax advantage, and the undeniable advantages of being an international holding center are obvious.

Of course, investors will want to move their holding centers to countries that can offer similar advantages as the Netherlands through their local legislation and tax treaties with Turkey; in particular companies that have invested in many countries and have a very solid business structure in the Netherlands will still want to maintain Dutch holding companies within the structure.

Considering the increasing measures and minimum substance requirements in the international tax arena, this would mean bearing the high costs of a second holding company in addition to the Dutch holding company.

Even though the choices of countries with regard to Article 5 of MLI has been different, for tax administrations, the discussion will still develop around the Principal Purpose Test (PPT), which is another sensitive point of the MLI. Moreover, the tax administration was discussing this “principal purpose” issue within the framework of Article 3 of the Tax Procedure Law, even before the MLI was within sight.

For companies that cannot tolerate the increase in costs due to their dual holding structure, but still want to keep holding companies abroad, a solution might be to dissolve Dutch companies without liquidation by way of cross-border mergers.


For the MLI to enter into force, the legislative and executive process in domestic legislation in Turkey will need to be completed. After Turkey notifies the OECD regarding the completion of this process, the MLI will enter into force the first day of the month following the end of the three-month period after this notification. However, the implementation of the provisions in the MLI is different to the entry into force of the MLI.

The date of implementation regarding the regulation that will override the exemption provision in the Dutch tax treaty is the taxation period following the end of a six-month period after the entry into force of the MLI in Turkey. Of course, it is not easy to estimate the timing of the approval process of the MLI; however, the date of implementation is likely to be January 1, 2022 at the earliest.

Planning Points

Regardless of where we stand, the arrangement intended to be made mean breaking a 30-year mould. From the perspective of investors, there will be increasing costs, maybe increasing tax burdens, an international investment structure that needs to be reconsidered, and many decisions and actions to be taken, and it carries risks in all aspects.

For the Turkish tax administration, although it seems that the desired result that has been sought for many years can be achieved via the MLI, the results may not make as significant difference as expected. It is also possible that there could be conflicts between tax revenues and returning foreign currency savings to Turkey. The way the proposal will be enacted will of course depend on the balance of power between the parties.

Companies that have directed their investments through Netherlands’ holding structures should follow the developments closely, taking into account the timing mentioned above, and at least make the necessary preparations regarding the alternatives and the steps to be taken before waiting for the MLI to enter into force.

We strongly recommend that companies investing abroad in the future should consider all priorities of the BEPS initiative and assume higher costs for investments for the purpose of their business plans, in order to fulfill the minimum requirements in that foreign jurisdiction.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Eray Büyüksekban is a Partner, Head of Global Tax Advisory Services, KPMG Turkey. He can be contacted at ebuyuksekban@kpmg.com

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